How Does the SEP IRA Contribution Limit Benefit You?

By Doherty • April 20th, 2011
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A Simplified Employee Pension Plan, commonly identified as a SEP, could be an ideal compromise for smaller businesses that are unable to provide a conventional retirement plan for their workers . A SEP plan allows employees of a company to make greater contributions to a traditional IRA through the company where they work . Most employees choose to join the plan since their contributions are taken from pre-tax income.

The SEP IRA contribution limit in this case is 25% of the employee’s annual compensation, up to a maximum of $49,000 per year. The particularly generous SEP IRA contribution limit allows employees to rapidly prepare for retirement. These accounts are appropriate for small businesses , as well as for LLCs, S and C corporations, sole proprietorships and partnerships.

Sep plans are also a very good option for the self-employed, however the self-employed SEP IRA contribution limit is calculated in a different way. Since the self-employed do not get wages, their contribution will be based on net profits from the business venture. Self-employed individuals can contribute 20% of net profits up to $44,000 per year. The contribution is calculated by taking the net self-employment income and subtracting one half of the self-employment taxes. The resulting net/net self-employment revenue is then multiplied by 20% to arrive at the contribution amount.

Businesses can very easily qualify employees to participate in the plan. An qualified employee must be 21 years old , have worked for the business for three of the last five years, and received at least $550 in compensation for their work. Once the money is funded to the plan it istotally vested, and SEP contributions are portable. They can be rolled into anotherplan , or in the case of a career change can be transferred to a new employer’s qualified retirement plan. With the higher SEP IRA contribution limit, these plans offer good opportunity in an easy to manage retirement program.

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